Darden Shareholder Details Objections to Red Lobster Spinoff

One of the largest shareholders of Darden Restaurants issued an investor presentation detailing its concerns with the proposed separation of Red Lobster, announced Dec. 19, 2013.

The investment group, Starboard Value, is pushing for a special meeting to be held before the 2014 annual shareholder meeting, held in the fall. Starboard Value argues the separation of Red Lobster from Darden “is the wrong spin-off, at the wrong time, and for the wrong reasons.” 

Its reasoning stems from the integrity of Red Lobster’s real estate, which it states is extremely valuable.

According to Starboard’s research, Darden’s real estate is worth, at minimum, around $4 billion. Instead of spinning off Red Lobster, Starboard is looking to separate the real estate—either through an outright sale, a Real Estate Investment Trust (REIT) spin-off, or a merger with an REIT.

In the presentation, Starboard details its operational, timing, and valuation concerns, citing the chain’s declining traffic growth and same-store sales. For fiscal third-quarter 2014, Red Lobster reported a decline of same-store sales of 8.8 percent, while traffic growth declined 14.1 percent during that period.

In announcing the spin off in December, Darden management acknowledged that Red Lobster’s “priorities and operating support requirements have come to differ meaningfully from those of Darden's other brands, which are having greater success increasing appeal among consumers outside their core guest profiles.”

To help deliver a more positive outlook for Red Lobster, management is promoting a strategy that gives the chain greater freedom to pursue its own marketing and operating program, tailored to the needs of its core guest profile.

Red Lobster has 705 restaurants in North America, and had sales of approximately $2.6 billion in fiscal year 2013. Sales slipped 1.7 percent last year at Red Lobster compared to fiscal year 2012, driven by a decrease of 2.2 percent in same-store sales in the U.S.

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